Both Canada’s Scientific Research & Experimental Development (SR&ED) tax credit and the US Research & Experimentation (R&D) Tax Credit are useful incentive programs that encourage research and development. While both were introduced in the 1980s, the US R&D tax credit was introduced slightly earlier than Canada’s SR&ED. Apart from this, there are many other differences between the two programs that you need to know especially if you have offices across both locations.
Here is a quick glance of a simple comparison between the two tax credit programs.
SR&ED vs R&D: Administration
Firstly, given that both tax credit programs are from different countries, the administration of each tax credit program is naturally different.. SR&ED is administered by Canada Revenue Agency while R&D is administered by US’s Internal Revenue Code.
SR&ED vs R&D: Eligibility
The two tax credit programs have different systems to determine if your project is eligible for their tax credits. To determine eligibility for Canada’s SR&ED program, your business must fulfill the following three criteria – technological advancement, technical content, and technological uncertainty. You can ask yourself the following questions:
- Are you involved in engineering, design, data collection, testing or other developmental work?
- Have you designed or developed new software?
- Have you changed a process to reduce costs or to improve your manufacturing?
- Have you created a new product, made improvements or added new features to an existing product, or built a prototype?
- Have you incurred costs related to a process, project or prototype that is incomplete because of unresolved technical problems?
On the other hand, the US R&D tax credit program determines eligibility via a 4-part test as follows:
- Permitted Purpose: the work must be done to develop a new or improved product or process.
- Elimination of Uncertainty: the work must be done in order to resolve technological uncertainty. A technological uncertainty exists if publicly available information and knowledge cannot be applied to achieve the desired result. Some questions to ask yourself are:
- What scientific or technological uncertainties did you attempt to overcome – uncertainties that could not be removed using standard practice?
- What work did you perform in the tax year to overcome the scientific or technological uncertainties described above?
- What scientific or technological advancements did you achieve as a result of the work described?
- Process of Experimentation: the work must be done in a systematic process to evaluate one or more alternatives to achieve the desired result.
- Technological in nature: the work must be within the physical or biological sciences, engineering or computer science.
When looking at real-world applications to put the R&D tax eligibility criteria into practice, you need to ask yourself if you have:
- Created a new product, made improvements or added new features to an existing product?
- Integrated various databases or applications that were not designed to communicate?
- Improved response time of your software application?
- Changed a process to reduce costs or to improve manufacturing capabilities/timing?
- Incurred costs related to a process, project, or prototype that is incomplete because of unresolved technical problems?
- Modified your product formulation?
- Automated production?
- Modified existing products or machines to new applications?
- Machined/fabricated parts/dies using new materials or to meet higher tolerances?
As such, we see that even determining eligibility for the two tax credit programs are already so different.
SR&ED vs R&D: Documentation
In terms of documentation, both tax credit programs are similar. The bigger the claim, the more documentation you would want to have.
Documentation required for both should be
- Contemporaneous: Documented at the time the R&D was done.
- Dated: You need to prove that the work occurred in the fiscal year you are claiming.
- Highlight technical challenges.
What counts as proper documentation is also similar for both tax credit programs. In general, the following resources are all good documentation materials: timesheets, technical documents, prototypes including software and physical products, test documents, developer or engineering notebooks, meeting minutes, whiteboard photos, emails, invoices and receipts.
SR&ED vs R&D: Tedious Process
While both tax credit programs benefit companies, the claiming processes might require time and effort. It might thus be best to engage professionals to help you and Boast.AI is definitely the perfect choice. Boast.AI helps innovative businesses automate the complicated process of claiming tax incentives.